What a Discount Really Costs You (and How Much More You Have to Sell)

The formula

A sweater sells for $80 and costs the shop $48, so each sale makes $32 of gross profit, a 40% margin. Take 20% off and the price falls to $64. The cost is still $48, so each sale now makes $16.

To earn the same total at $16 a sweater as at $32, the shop has to sell twice as many. The general version: the extra sales you need = discount ÷ (margin − discount). Here that's 20% ÷ (40% − 20%) = 100%, which is double.

The formula has a nasty edge. As the discount approaches the margin, the required increase heads toward infinity. At 40% off, the shop is selling at cost and no amount of volume brings the profit back.

The same arithmetic as a table

At a 30% margin, a 10% discount needs 50% more units to break even, and a 20% discount needs 200% more, three times the original volume.

At a 40% margin: 10% off needs a third more units, 20% off needs double, and 30% off needs four times as many.

At a 50% margin: 10% off needs 25% more, 20% off needs 67% more, and 25% off needs double.

At a 60% margin: 10% off needs 20% more, 20% off needs 50% more, and 30% off needs double.

The pattern is the useful part. Low-margin businesses can barely afford discounts at all, and even high-margin ones need a lot more volume than the discount's size suggests.

What the formula leaves out

The break-even figure assumes every discounted sale is a new one. Many aren't. Some customers were going to buy at full price anyway, and the discount simply gave them money back. That cannibalization is pure cost.

Other customers buy now instead of next month. The sale moves in time but doesn't grow, and next month looks weak in comparison. Retailers call it pull-forward, and it's why a big promotion is often followed by a quiet stretch.

Discounts also teach customers what your prices really are. Run 25% off every few weeks and your regulars learn to wait for it, which lowers the reference price they carry in their heads and makes the full price feel expensive.

A promotion, checked properly

The shop from the example sells 500 sweaters in a normal month, making $16,000 of gross profit at $32 each. It runs 20% off for a month and sells 900. Sales are up 80%, and the promotion looks like a hit.

The formula said it needed to double, to 1,000, just to stand still. At $16 a sweater, 900 sales make $14,400. The busiest month of the year earned $1,600 less than a quiet one.

Then the month after. If 100 of the extra buyers were people who'd have come in next month at full price, next month loses 100 sales at $32, another $3,200. The promotion that moved 400 extra sweaters cost the shop $4,800. None of that shows up in a sales report, which is why promotions keep getting run.

When a discount is still the right call

Clearing stock that's aging. A winter coat that won't sell at full price in November may need 60% off in March, and 20% off now can be the cheaper option. Holding inventory also costs money every month it sits.

Winning a customer worth more than the first order. If an average customer buys four more times after the first purchase, losing money on that first order can be a good trade. That depends on knowing the customer lifetime value, not hoping for it.

Selling the item that sells other items. A loss leader works when enough buyers also purchase something profitable alongside it. Printer makers have long sold the printer cheaply and made their margin on ink.

Filling capacity that would otherwise go unused. An empty hotel room tonight earns nothing tomorrow, so a discount that fills it costs little beyond cleaning. The same logic applies to appointment slots and seats.

Cheaper ways to give customers a deal

A free-shipping threshold set a little above the typical order raises the average order value instead of lowering the price. A bundle offers a discount on a combination while leaving each item's own price intact. A gift with purchase can feel worth its full retail price to the customer while costing you only what you paid for it: a $10 item that cost you $3 is a $10 incentive for $3.

Loyalty credit is cheaper than it looks. A $10 credit only costs anything when it's used, it's used on a return visit you might not otherwise have had, and some of it is never redeemed at all. A straight $10 off costs the full $10 now, on a sale you may have made anyway.

Key takeaways

• A discount comes entirely out of the profit, so its effect on profit is much larger than its size suggests.
• To keep gross profit flat, sales must rise by discount ÷ (margin − discount).
• The break-even figure is optimistic: it ignores sales you'd have made anyway, sales pulled forward from next month, and customers learning to wait.
• Discounts earn their cost when they clear aging stock, win customers with known lifetime value, sell attached items, or fill capacity that would expire unused.

Frequently asked questions

How much do I need to sell to make up for a discount?

Divide the discount by your margin minus the discount. With a 50% margin and 20% off, that's 20 ÷ 30, so you need two-thirds more units to earn the same gross profit as before.

Is a buy-one-get-one offer the same as 50% off?

Per item sold, yes: two items for the price of one is half price on each. The difference is that the customer has to take two, which raises the order size and moves more stock, and that can make it cheaper for you than 50% off a single item.

Do discounts hurt a brand?

Frequent, predictable discounts can, because customers learn to wait for them and start to see the full price as inflated. Occasional promotions with a clear reason, such as an end-of-season clearance, do much less damage.